The first sign of a Russian economic crisis is a line of desperate people, pushing and shoving outside a locked door, on which a scribbled sign has been posted indicating that the cash those outside thought they owned would be unavailable until further notice.

In the classic Soviet tradition, a handful of enterprising individuals would go to the back door to see what could be arranged out of the glare of publicity and with a little bribery for those inside. There they were told the truth – their money had gone.

So far, as the financial crisis continues to engulf the world, only four or five Russian banks have gone to the wall, visibly – KIT Finance, a small St Petersburg investment institution connected to cabinet ministers; Bank Soyuz, the cash box of Oleg Deripaska’s aluminum-based holding; EvrasiaTsentr (“Eurasia Center”), a tiny Moscow lender; and Globex, a slightly bigger retail deposit bank, also in Moscow.

All have been swiftly secured, without the distress becoming too public or a line of angry depositors forming outside. The sale of Renaissance Capital, a fifth investment house, for a fraction of its pre-crisis value, was another distress sign, but not in the mass market.
The apparent calm reflects Russians’ confidence in the state. Since the earlier financial crises of the post-communist period were all triggered by the weakness of the state treasury, Russian depositors believe their savings are relatively secure this time because state reserves are huge and the state banks flush. And the depositors are right.

They can also hear their leaders assuring them that the state budget will be used to revive and re-stimulate domestic investment and demand. A decade ago, former president Boris Yeltsin let the International Monetary Fund dictate massive cuts in government spending while letting his brand new oligarchs ship the untaxed profits of their export concessions in oil, gas, steel, nickel and aluminum to safe havens abroad. This time there is no danger of the first type of disinvestment. The second type is also less likely, because President Dmitry Medvedev and Prime Minister Vladimir Putin control the oligarchs and not the other way round.

Nonetheless, there is a crisis queue right now; according to Vnesheconombank (VEB), a state financial institution, at the last count there were 55 applicants for help standing outside the door. Until this month, the 55 – 20 banks and 35 industrial corporations – were among the most powerful and richest enterprises in the country, whose shares made their proprietors the richest men in Russia and in Europe.

VEB has a history of servicing lines of desperate Russian enterprises. Begun in 1922, it was the first state trading bank after the communist revolution had wiped out privately owned, commercial banks and initially handled short-term financing needs for export-import transactions. By the time the Soviet Union ended in 1991, VEB was responsible for all foreign debts of the defunct state.

Renamed the Bank for Development in 2007, it has been revived as the conduit through which the vast cash reserves and special wealth funds of the government can be channeled into the domestic economy.

Not since the 1920s has VEB played the role of peak power banker to Russian commerce. Then and now, that’s a unique political role, and those on the present VEB board have their own special standing in the current factional alignment between the Kremlin of Medvedev and the White House (as the prime ministry is known in Moscow) of Putin.

Putin is chairman of the VEB board. Under him sit eight members, including Victor Zubkov, first deputy prime minister and the senior official in charge of domestic consumption and agriculture; Sergei Ivanov, a former intelligence officer, defense minister, and now supervisor of the military-industrial complex; and Dmitry Kozak.

Kozak, a St Petersburg lawyer, was until this week obliged to cool his heels as the junior minister of regional development. On Tuesday, he was promoted by Medvedev to be minister in charge of the preparations for the Sochi Olympic Games to be held in the winter of 2014.

Although that job remains a provincial one, and Kozak has not quite escaped the exile from Moscow into which he was sent in September 2004, he is a powerful figure for the faction that opposes the ambitions of Deputy Prime Minister Igor Sechin and his allies. Sechin, a former Kremlin assistant to Putin, is now the deputy prime minister in charge of resources, energy and industry. In that position, he supervises the concessions through which the oligarchs control their oil, gas, metal and mining empires. Those who have challenged Sechin in the past – cabinet ministers, the head of the state oil pipeline company, the head of the state tanker fleet, as well as St Petersburgers Ivanov and Kozak – have all been beaten, and many forced into exile. For some, opposing Sechin has led to prison or foreign asylum.

The first challenge to Sechin since Medvedev became president in May was the clash between British Petroleum (BP) and TNK-BP, controlled by Mikhail Fridman. As Fridman openly pointed out, BP had tried to oust Fridman and his co-shareholders by making a secret pact with Gazprom to buy them out. What Fridman didn’t say was that Medvedev, formerly chairman of the Gazprom board, and his legal counsel at Gazprom, Konstantin Chuichenko, had encouraged BP to believe it would be supported. BP then made the mistake of trying to play Kremlin politics. Fridman rallied Putin and Sechin, who also serves as chairman of Rosneft, the state oil producer. Medvedev saw the lineup, and the outcome was inevitable. BP was defeated, and TNK-BP emerged with Fridman to call the shots on how this oil company will be managed in future.

Fridman and his diversified conglomerate of banking, oil, mining and other assets has also consolidated his relationship with Medvedev. On present indications, Fridman’s core business, Alfa Bank, is “in great shape – cash on hand, unexposed and gaining market share”, an insider claims. “We see the current environment as an opportunity to increase our market share in our retail, commercial and investment banking businesses.”

Fridman is also the only commercial banker publicly known to have met Medvedev since the crisis broke. That was on October 6. The following day, Medvedev met with and the state bankers – from SBerbank, VTB and VEB and the head of the central bank head.

Such visible signs are clues. Calculations of how much paper value the Russian oligarchs have lost in the crisis create mind-boggling numbers, but their accuracy is questionable. That’s because they don’t discriminate between the gross wealth generated by stock market value and the wealth that is net of debt. Leverage is now the key to the survival of Russia’s biggest enterprises and the oligarchs who control them; the lower the leverage, the higher the survival chances.

But if oligarchs lack short-term liquidity or access to credit, they face loss of assets, dwindling of their cash piles and re-nationalization – that is the transfer of their concessions to competitors.

What passes through the money window of VEB is therefore the real evidence of how the distribution of power may be changing in Russia today. Sechin, it should be noted, is not a member of the VEB board. This creates a more level playing field at VEB for those aspiring to enlarge their concessions, and attack those concessions Sechin protects. This is now the revolutionary dynamic of Russian politics. It is also governed by simple arithmetic.

Legislation enacted by parliament last week for the emergency stimulus of the Russian economy provides up to US$50 billion in loans from VEB for the refinancing of foreign debt which Russian banks and other companies have raised but face trouble repaying or refinancing in the current crisis. That’s the amount in the vault, behind the locked door, in front of which stands the queue of 55. The notice on the door says that credits will be issued on a discretionary basis, priced at no less than 5% over the benchmark London Interbank Offered Rate, and – here’s the crunch – no more than $2.5 billion for a single applicant.

According to VEB chairman Vladimir Dmitriev, the aggregate borrowing applications already amount to more than VEB has agreed with the government and central bank to lend. Who gets refinancing, and how much, is thus a crucial test of how stable the current oligarch system is, and how likely the concessions they administer may be about to change. VEB has promised the queue that within 18 days it will decide on all applications filed by October 25.

The first test puts Sechin on the defensive, for it is his Rosneft whose financing need is the largest and most urgent. Rosneft absorbed the oil production assets of the defunct Yukos when its founder Mikhail Khodorkovsky went to jail and Yukos was convicted of tax fraud and wound up. The company now owes $11 billion in short-term debt, and $23 billion in total debt. Only Gazprom is more heavily leveraged, with $21 billion in short-term debt and $61 billion in long-term debt.

According to news repots in Moscow, Rosneft has applied to VEB for $4.2 billion in emergency cash; LUKOIL, controlled by Vagit Alekperov, for $2 billion; Fridman’s TNK-BP for $1.8 billion; and Gazprom for $1 billion. At the moment, LUKOIL has total debts of almost $9 billion, and short-term pressure for $2.3 billion. TNK-BP owes $1.9 billion in aggregate, but only $277 million must be funded soon.

Rosneft is under the heaviest immediate pressure. This pain translates, for Sechin’s rivals, into potential political opportunity. If Sechin stumbles in the Rosneft refinancing, then his rivals in government may argue that Rosneft should be reorganized. That would mean a new state team taking over from Sechin loyalists.

Rosneft must pay $750 million of debt by December 31 and $2.4 billion three months later. Given that the price of oil is falling, and production is not increasing to offset this, nor foreign demand for oil exports, Rosneft must test the full extent of its political clout to secure cash. It has already refinanced $2.35 billion of debt on September 17, using 4.67% of its shares (out of 9.44% treasury stock) as collateral. Whatever VEB decides to loan Rosneft, the company has other state lenders to whom it can turn.

There are reports that one option is a $2 billion credit line from a consortium of Sberbank, the state savings institution; Gazprombank, which is owned by the state through Gazprom; and VTB, a state controlled bank. More credits might be available bilaterally from Sberbank and VTB.

In addition, Rosneft is negotiating an export finance facility with Chinese banks that is tied to the flow of crude oil to China, currently running at 10 million tonnes per annum (192,000 barrels daily). China wants much more, but overland delivery by pipeline through eastern Siberia is taking time to build. Tanker delivery by sea is costly, and no longer so profitable to arrange for traders such as Gunvor, which dominates Rosneft’s marketing of oil. The Geneva-based Gunvor is owned by Gennady Timchenko, a close ally of Sechin. What happens to him, and their alliance, is now in the balance.

Gunvor has told Asia Times Online it is seeking finance to expand Timchenko’s stakes in the Baltic energy trade, including a new Russian oil terminal at Ust-Luga, as well as rail transportation of oil, tanker fleet operations, and gas exports.

The decline of Russian equity values has reached the level where the underlying asset value is based on a price of a barrel of oil of $50 to $60, industry analysts have told Asia Times Online. If this materializes in the export markets, the industry will see Rosneft demanding an end to trade discounting under the market price. It will also cause a significant delay in the sale of shares of the merged and privatized tanker fleets of the two state-owned shipping companies, Sovcomflot and Novorossiysk Shipping Company (Novoship).

Merged, as Sechin has arranged, and privatized as Timchenko wants to see, the combination of Sovcomflot and Novoship makes one of the world’s largest oil shipping companies. If Rosneft catches a cold, Russian ports, pipelines, and fleet companies, which depend on it, may begin to suffocate.

“According to the exchange quotes, the share price of Novoship has dramatically fallen even from the price of Sovcomflot’s minority share buyout offer,” said Kirill Kazanli, a Troika Dialog analyst in Moscow. “Sovcomflot proposed $3.36 per share, while the current price is around $2 per share. The market for these shares has simply disappeared.”

Kazanali told Asia Times Online that an international IPO for the Russian tanker group is now unlikely until 2010.

Alexei Bezborodov, a leading transportation analyst in Moscow, says that the valuation cut reflects the oil price now, and tanker rates later. “I think their revenues are dependent on freight rates, not on oil prices. And freight rates don’t always correlate with oil prices, although now they do. There is a lot of news about the dramatic fall in freight rates and growth in tanker availability. But as Sovcomflot and Novoship both operate on long-term freight contracts, their revenues won’t be affected immediately. They have contracts roughly until May 2009.”

According to Kazanli, excess capacity and falling tanker rates will strike as Sovcomflot and Novoship must pay for new vessels. “They have very big new-building portfolios for the next two to three years, and a long-planned expansion of tanker capacities. This is definitely not a very attractive configuration for the market for the next two years.”

Rosneft and Gazprom are at the head of the line in front of VEB’s loan window. But close behind them are all of the oligarchs, representing all of Russia’s mineable resources, power sources, industrial assets, and consumer demand.

Oleg Deripaska, who controls the state aluminum champion, is looking for $10 billion, divided between United Company Rusal, and his holding Basic Element. Vladimir Potanin, the controlling shareholder of Norilsk Nickel, Russia’s largest mining enterprise, argues that VEB should not lend Deripaska money he borrowed to start a hostile takeover against Norilsk Nickel.

The application process for state funding obliges Medvedev and Putin to make a choice between oligarchs and their competing demands. And this in turn triggers the choice of whom they prefer.
Enterprises and assets which were once handed out by Yeltsin, in return for little more than a bribe, are now passing back to the state, stripped of their cash, heavily indebted, their shares or property mortgaged and potentially forfeit to foreign lenders.

The last time such a momentous policy choice materialized in Russia was in 2003, when oil was less then $20 per barrel; the US was preparing to attack Iraq and lower oil to $13 per barrel; and Khodorkovsky proposed selling Yukos to a US oil company. For the five succeeding years, the oligarchs have largely avoided positioning themselves under the chopper that decapitated Yukos and Khdorkovsky. Now reason and cause may be different; but the stakes for Russia’s future are just as high, and the axe is still as sharp.

Read Putin’s lips carefully. Last week, he said: “We should refinance only those credits which were involved for realization of investment projects or acquisitions of shares in Russia.”

That means he intends to make a choice. Oligarchs with famously expensive houses in London or the French Riviera, English football teams, steelmills in the United States and aluminum smelters in Nigeria, need not apply. Disinvestment in Russia, job cuts, transfer pricing of profit abroad – these are criteria for passing over an applicant for bail-out finance from the state.

“The crisis has shown,” said Sergei Chizhov, a former federal oil minister, “that without the aid of the state, Russian companies realize that they cannot survive. I do not exclude that Rusal can be nationalized.”

The implication is that those of Russia’s leading corporations left penniless outside the VEB loan window, when it closes, face re-nationalization. For this to happen requires another revolutionary shift of Russian political and financial power. Don’t mistake how stationary the VEB line looks to be, for how rapidly this revolution is moving at this very moment.